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[Value Snapshot] A Strict Shift In The Deal Dynamic

Ok, I am on an appraisal-related commentary binge [1] lately. But thats to be expected when the lending system is in upheaval and the appraisal industry was the enabler of the misguided/unethical application of risk. Some of it was the appraisal industry’s fault for capitulating to pressure, while an equally large portion of blame goes to lenders who applied the pressure.

There has been a shift in the deal dynamic as evidenced in this recent article: Suddenly, Stricter Appraisals [2] by Lisa Prevost in the New York Times.

“A house is only worth what the bank says,” said Terry Hastings, a partner at Hamilton Mortgage, in Ridgefield. “It’s not worth what the buyer says anymore.”

Spoken like a mortgage broker. One of the reason so many mortgage brokers have gone under in the past year has been their inability to find “good appraisers.” I continue to be amazed that most people think banks call their appraisers in and tell them to be “more conservative.”

It’s all about underwriting these days. Banks are actually reading reports now (I kid you not).

Mortgage lenders determined to stave off additional losses are demanding more thorough home appraisals and carefully reviewing valuation figures. If an appraisal is deemed too thin on supporting data, lenders may reduce the loan amount for the property, or not make the loan at all.

If lenders aren’t comfortable with the appraisal or the data is too thin, the underwriter simply raises the LTV.

Lower-than-expected bank appraisals are indeed sending some buyers and sellers back to the bargaining table for another go-round, said Rosamond A. Koether, a lawyer with Cohen & Wolf, in Westport. But in her experience, the tougher appraisal standards are more often an obstacle for homeowners hoping to restructure debt by refinancing.

If buyers and sellers willing re-negotiate the deal because of a low appraisal. Guess what? That’s market value.

What’s interesting about the article, is the mention of the greater difficulty in refinancing and the appraisal. That’s because of two reasons. First, there is not a flesh out transaction to observe between a buyer and seller to create value credibility. Secondly, the property owner is more likely to estimate their property value based on what they need, rather than what it is worth. The orientation is skewed after years of simply asking what they needed and getting it (or more).

Many lenders are requiring “comps” sales of comparable properties used to help determine a home’s value no more than 60 to 90 days old, and within a mile of the property being appraised.

While that’s a reasonable and fair request in a changing market, there are fewer sales in many housing markets today and meeting these suddenly stricter expectations [3] is not possible, which essentially leads to a deal being killed.

One of the items that was not mentioned in the article is the blame the appraiser gets for a deal falling through. Often times, a bank or mortgage broker will tell the borrower that the appraiser “killed” the deal or presented something that prevented the deal from happening. A very sleazy practice to say the least.

The biggest problem in lending today is the fact that while they are more strict with underwriting, they haven’t done a thing to improve the quality of the appraisers they hire. They are still focused on low cost appraisals, bang ’em out. Given the mortgage market upheaval…it’s amazing.

“It used to be banks would call and the first question they would ask was, ‘How familiar are you with a particular area?'” he said. “Now, that conversation starts with, ‘What’s the lowest fee you can offer and what’s your fastest turnaround time?'”

In the state of this housing market, the word “strict” needs to be appraised for it’s relativity.

Aside: This stuff is all very interesting, but how does this trade group track this specific data? [4] Enquiring minds want to know.